02 October 2017 by Daniele Vitale
Georgeson's annual review of the FTSE companies’ meetings.
It has been an intense annual general meeting (AGM) season, with an increased focus on diversity and new regulations on the horizon. We have seen that executive pay remains a substantial issue in many European markets, alongside increased attention on director elections.
As in previous years, the season continues to extend well beyond four months in spring, with passive investors, who track indexes and cannot sell their holdings, concentrating more on their governance teams and how they exercise their voting rights.
Our review of the 2017 UK AGM season analyses companies that held their AGMs between 1 August 2016 and 31 July 2017, and which were part of the main large-cap stock market index (the FTSE 100 and FTSE 250 indexes).
The review looks at AGM participation levels, rejected and contested resolutions and proxy advisor recommendations.
The participation levels of a company’s AGM can indicate how engaged its shareholders are, although it is also dependent on factors such as the meeting type and location of its shareholder base.
Low participation levels pose a particular risk to companies as they magnify the voting power and influence of minority shareholders or activist investors at the meeting.
During the 2017 AGM season the average participation was 73.4% for the FTSE 100 and 73.3% for the FTSE 250. Over the past five years the average participation for the FTSE 100 has been steadily increasing and stands 2.4 percentage points higher than participation levels in 2013.
However, for the first time in five years the average participation of the FTSE 250 has fallen below that of the FTSE 100 (the 73.3% is down from its 74.1% peak in 2015).
“Low participation levels pose a particular risk to companies as they magnify the voting power and influence of minority shareholders”
Across the main European markets, participation levels have remained constant, with the mid-cap indexes in France, the Netherlands, Germany, Italy and Spain having a higher participation than the large-cap indexes.
For the large-cap indexes in 2017, Germany had the lowest average participation level at 60%, while the UK had the highest participation (73.4%).
Across the FTSE 100, two companies each had one board-proposed resolution rejected by shareholders during the 2017 AGM season: Pearson and Old Mutual.
In the FTSE 250, five companies each had one board-proposed resolution rejected by shareholders: Centamin, Crest Nicholson Holdings, Tullow Oil, AA, and Riverstone Energy Limited.
At Pearson’s 2017 AGM, the advisory vote on the directors’ remuneration report failed to achieve support from shareholders, with only 34.4% of shareholders supporting the proposal.
Following the meeting the board stated that they ‘were disappointed that the advisory vote for this year’s remuneration report was not passed and that, although passed, there was a significant minority vote against both our remuneration policy and the re-election of our remuneration committee chair, Elizabeth Corley’.
‘Naturally, we acknowledge this feedback and thank those shareholders who have already spoken with us and explained their reasons for not supporting the relevant resolutions,’ it said.
According to The Telegraph: ‘Two-thirds of shareholders rejected the company’s remuneration report at its AGM after [CEO John] Fallon received a £343,000 bonus, equivalent to a 20% pay rise, despite having presided over its worst 12 months in nearly half a century on the stock exchange.’
At Old Mutual’s AGM, the proposal to issue shares without pre-emptive rights failed to gain the 75% (supermajority) support necessary for the resolution to pass, with a vote in favour of 74.4% (compared to 83.5% support at the 2016 AGM).
Following the meeting, the board stated that ‘whilst the company is disappointed with this outcome, as explained in the AGM circular the directors had no present intention to allot any shares pursuant to this resolution’.
‘Whilst both these resolutions are considered routine for listed companies in the UK, the company is aware that certain overseas institutional investors, mainly in South Africa, have a policy of not supporting them,’ it said.
‘The company will continue to engage with those shareholders to improve understanding and, if possible, allay any such concerns for the future.’
“Dissent around executive remuneration continues to dominate press headlines, and it remained a contentious subject during this year’s AGM season”
The resolution to re-elect Trevor Schultz as a director failed to gain a majority vote at Centamin’s AGM, with only 34.9% of shareholders voting in favour
of his re-election.
Following the meeting the board stated ‘the company has considered the reasons for the votes […] and believes that these relate primarily to the appointment of Trevor Schultz to the remuneration committee in September 2016’.
Despite the vote result, the nomination committee, in the absence of Schultz, suprisingly recommended the board re-appoint him.
The board accepted this recommendation, saying: ‘Trevor will be re-appointed to his existing roles as chairman of the HSES committee and member of the nomination committee but will not re-join the remuneration committee.
‘The board has taken this decision in light of the vital role that Trevor plays for the company, bringing his deep technical knowledge to assist the board’s oversight of the company’s operations and chairing the HSES committee which is responsible for making critical recommendations to the board on all matters in connection with issues of the environment, workplace health and safety and the sustainable engagement with communities and stakeholders.’
Dissent around executive remuneration continues to dominate press headlines, and it remained a contentious subject during this year’s AGM season, as some of the rejected resolutions such as Pearson and Crest Nicholson show.
With the government making executive pay a cornerstone of its review of corporate governance and the resultant green paper, this is unlikely to change in the next year.
The new requirement for companies to publish the pay ratio between the chief executive and the average UK worker may have an impact here, as the media stands ready to pounce on figures it deems irresponsibly high.
Any negative press will likely be unsympathetically received by investors and we could see higher levels of opposition to resolutions during next year’s AGM season – whether directed at the remuneration policy or at specific directors, such as remuneration committee chairs, who are deemed to have failed to curb the upward trajectory of pay.
Boardroom diversity is another area that has received considerable attention in 2017. With the work of the Hampton-Alexander and Parker reviews pushing companies to improve the balance of diversity on their boards it will be interesting to see how this affects next year’s voting.
Directors and chairs of nomination committees may find themselves in the firing line if low diversity levels continue on company boards with little evidence of effort to remedy the situation, especially as there are murmurings that some of the leading proxy advisors will be advocating exactly this.
FTSE companies naturally receive more public attention because of their status, and this can mean shareholders are loath to vote too aggressively negatively (except in serious situations) for fear of the detrimental effect on share price this can have.
Despite this, the FTSE AGM results can still act as a useful bellwether for the rest of the listed sector with regards to the trends and areas of contention that company secretaries should be aware of.
Henry Ker is editor of Governance and Compliance
We also reviewed how many resolutions were contested, which we define as receiving more than 10% votes against.
During the period assessed, among FTSE 100 companies, 54 companies saw at least one board-proposed resolution receive more than 10% shareholder opposition (compared to 67 in 2016). The total number of resolutions that received over 10% opposition amounted to 119, compared to 120 resolutions in 2016.
One of the most commonly contested resolutions were authorities to issue shares with and without pre-emptive rights, which saw 38 proposals receive more than a 10% against vote.
Authorities with pre-emptive rights are proposed as ordinary resolutions (requiring a simple majority) while authorities to issue shares without pre-emptive rights are proposed as special resolutions (requiring a 75% majority).
“One of the most commonly contested resolutions were authorities to issue shares with and without pre-emptive rights”
Furthermore, 38 director elections also received more than a 10% against vote during the reporting period. This is a 100% increase from 2016, as more investors held individual directors accountable for their actions on their respective boards.
The third most commonly contested resolutions related to the approval of the remuneration report, which saw 18 proposals receive more than a 10% against vote during the reporting period. This is a decrease from 2016 when 25 proposals received more than 10% votes against.
A negative recommendation from a proxy advisor can have a serious adverse impact on the vote outcome of a proposed resolution. Many institutional investors rely on proxy advisory firms to steer them in their vote, and in the UK the main proxy advisors are ISS, Glass Lewis, IVIS and PIRC.
During the AGM season, 20 FTSE 100 firms received at least one against or abstain recommendation from ISS (compared to 24 in 2016), for a total of 30 resolutions (the same as in 2016).
Additionally, 29 FTSE 100 companies received at least one against or abstain recommendation from Glass Lewis (compared to 81 in 2016), for a total of 44 resolutions (compared to 133 in 2016).
During the reporting period, Glass Lewis changed its policy on the short notice periods for extraordinary general meetings (EGMs), which is proposed by most FTSE 100 companies; since this, the number of its negative recommendations has fallen dramatically.
There is a clear correlation between negative proxy advisor recommendations and lower vote results. For instance, across the FTSE 100, the five remuneration reports with the lowest level of support all received a negative recommendation from the majority of the proxy advisors covered in our analysis.
For Georgeson’s 2017 Proxy Season Review, please visit the firm's website.